Documente Academic
Documente Profesional
Documente Cultură
November 8, 2006
Table of Contents
SECTION 1 SECTION 2 SECTION 3 SECTION 4 APPENDIX A APPENDIX B APPENDIX C APPENDIX D
Overview of Investment Banking Role of Analyst and How to Get the Job Career Opportunities at UBS Investment Bank UBS Investment Bank: A Global Leader Understanding the Financial Statements Understanding Debt and Equity Valuing a Company Terms to Know
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SECTION 1
Investment Banking Revenue Generators Sales & Trading Asset Management Private Equity
Investment Bank
Research Analysts
Support Services
Giving Advice
Raising Capital
Giving Advice
Investment Bankers act as advisors to industry leaders and key investors
Prospective buyers
Raising Money
Investment Banks act as an intermediary between entities that require capital and investors
Private Equity
Pension Funds Insurance Funds Individuals
Governments
Simply put, Investment Bankers get money for people who need itfrom people who have it
Industry Groups Consumer Products & Retail Energy and Power Financial Institutions Healthcare Global Industrial Group Real Estate Technology/Media/Telecom Transportation & Services
Product Groups Debt Capital Markets Group Equity Capital Markets Group Equity Corporate Finance Team Financial Sponsors Leveraged Finance Global Syndicated Finance Mergers & Acquisitions Private Equity Placement Group
SECTION 2
Managing Director
Executive Director
Director
Associate Director/Associate
Analyst
You!
Team sizes can range from 3 to 5 people and consist of at least an Analyst, mid-level banker (AD or D) and a senior level banker (ED or MD)
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Personal Skills
Technical Ability
Finance (capital structure analysis: equity vs debt) Valuation techniques (comparable company analysis, precedent transactions, discounted cash flow)
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find out about their experiences and their views seek out classmates who have interned in Investment Banking
focus on how the various banks differentiate themselves in terms of culture, prospects and responsibility given to Analysts
Positioning yourself
It is important to present yourself as having a portfolio of skills and qualities There are several skills and qualities that banks look for technical ability and a strong interest in finance familiarity with Excel strong interpersonal skills ability to work within teams relevant work experience a record of success/achievement
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A Team Player
Team-driven job accomplishments on resume Other obvious team experiences and team successes The objective is to demonstrate that you work well with others
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talk to individuals who work or have worked within the industry read industry guides such as Vault and Wet Feet each Investment Bank has its own unique culture focus on the places where you fit best and go after those firms
become familiar with financial terminology progress further along the learning curve increase the likelihood of securing a full-time offer
Enrolling in these courses further demonstrates your interest and commitment to the industry
familiarize yourself with that industry and a few companies within that sector
Understand an industry and be able to talk about it intelligently Suggested readings: Wall Street Journal, Financial Times, The Economist, Fortune, Business Week, Forbes, etc.
what is the reasoning behind the decisions you have made and what have you learned from those experiences investment banks are looking for individuals who can demonstrate that they possess good judgment
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Helpful References
Books About Investment Banking
Auletta, Greed & Glory on Wall Street Bhatawedekhar, Vault Guide to Finance Interviews Brealey & Myers, Principles of Corporate Finance
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SECTION 3
Key Dates:
We offer separate resume drops and interview schedules for each office
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APPENDIX A
Income Statement Shows how much a company makes over a period of time
Balance Sheet
Statement of Cash Flows Shows how much cash a company generates over a period of time
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Comment How much you get paid for the items you sell How much the items you sell cost you How much you have left after paying for items you sell How much it costs to market your goods and run your business A proxy for how much cash your business generates A non-cash cost (more on p.7) How much profit the operations of your company generates Interest you pay on debt Income tax you pay How much you have left after all costs are paid for Net income divided by the number of shares in this case, there would be 10,000,000 shares
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Assets
Liabilities
Money a company owes its suppliers Debt that must be paid back within a year Debt that must be paid back over a longer period of time than one year
Short-Term Debt Long-Term Liabilities Long-Term Debt TOTAL LIABILITIES Paid-In Capital
95 120 10 40 50 170
Your initial investment in your company Net income you reinvested in your company (e.g., used to buy new factories)
Equity
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What Is Depreciation & Amortization? Example: You buy a factory for $100mm
you pay cash upfront
You expect to use the factory for 20 years So, even though you pay $100mm cash in the first year, you spread the expanse equally over 20 years on your income statement
i.e., $5mm/year for 20 years this $5mm annual cost is called Depreciation
Accrual accounting matches a cost to when you benefit from it (e.g., when you sell something)
In short, depreciation takes a large, one-time cost and matches it over time to sales of goods produced by the factory
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DepreciationA Visualization
The information below shows a visualization of how depreciation works The Initial Purchase The Estimate
$5mm
$5mm $100mm $5mm $5mm
$5mm
$5mm $5mm $5mm
$5mm
$5mm $5mm $5mm
$5mm
$5mm $5mm $5mm
$5mm
$5mm $5mm $5mm
Year 1
$5mm
By Year 10
$5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm
By Year 20
$5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm
In Year 21
New Factory
$5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm
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Line Item
$mm
Comment
Net Income Plus: D&A Less: Change in Working Capital Cash Flow from Operations
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See p. 5 See pp. 7 and 8 Ignore for now How much cash your operations generate
(5) (5)
Cash paid for new factories and such How much cash you spend investing in your business
Less: Dividend Paid Plus: New Debt Cash Flow from Financing
(2) 20 18
Dividends paid to stockholders Borrowed cash How much cash financing your business costs
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How much your cash on your balance sheet increases/decreases over a given period
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Net Income
Cash Flow
Beginner
No impact
$30
+$50
Advanced
No impact
$100mm
+$10mm
In theory, differences between net income and cash flow will balance out over the long runbut we can learn a good deal from the short-term differences
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Income Statement
Revenue Cost of Goods Sold Gross Profit SG&A EBITDA Depreciation & Amortization Operating Profit Interest Taxes Liabilities Assets Cash
Balance Sheet
Change in Cash
The above shows some key relationships, but by no means is all inclusivethis is what makes attention to detail in financial modelling so important
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Some Uses of Financial Statements Profitability margin benchmarking Base for forward projections
(% )
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Example: Benchmarking
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Accretion/(dilution) analysis Financing models Valuation multiples Potential value creation models Source of data on key industry trends And much, much more
37.6
37.2
35.0
33.6
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25.7
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0 Avon
Source: Company reports
L'Oral
Beiersdorf
Clarins
Este Lauder
Notes: 1 Includes Beiersdorf, Clorox, Colgate-Palmolive, Este Lauder, Kimberly-Clark, LOral and P&G 2 Includes Beiersdorf, Clarins, Este Lauder and LOral 3 Based on broker estimates; COGS calculated as purchases and variation in inventories, 75% of personnel costs and depreciation; 2004 figures adjusted per IAS 18 to deduct 828mm in sales incentives and 52mm in cash discounts to customers from net sales and SG&A in compliance with IFRS standards
The above chart raises questions about Avon and Este Lauderwhy might they be so far apart on this metric when both sell cosmetics?
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APPENDIX B
What Is Debt?
Debt is one way a company can get cash to fund its business needs
How Does Debt Impact a Company? A company typically has to pay interest
on debt
paying interest requires cash Eventually, the company must repay the debt
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What Is Equity?
Equity is another way a company can get cash to fund its business needs
Equity Equity is an ownership stake in a company A company can raise money by offering ownership stakes in the company in exchange for cash
How Does Equity Impact a Company? The equity holders of a company together represent 100% of the ownership of a company Owners are entitled to a share of the profits (after debt holders receive interest) Profits may be paid out in the form of dividends or equity holders may vote to reinvest them in the company and grow the business
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Equity = Total shares outstanding x share price note: this is called a companys market value
Low Debt-to-Cap
Debt 30%
Equity 70%
Together debt and equity show the total of all a companys fundingor Total Capitalization
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Debt
Equity
Does not reduce (dilute) current ownership Investors do not require as high a rate of return because it is less risky for investors
Requires stable cash flows to cover interest payments exposes company to bankruptcy risk in bad times
Dilutes current ownership if a company has 100 shares and sells another 100 shares (for a total of 200 shares), the original shareholders own half as much as before Investors require a higher rate of return given less certainty of returns
Balancing these issues creates a unique optimal capital structure for every company
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APPENDIX C
Valuing a Company
Determines value by looking at similar companies similar scale, industries and markets Use multiples to make apples-to-apples comparisons
Precedent Transactions
Determines value by looking at transactions involving similar companies Also uses multiples to make meaningful comparisons
The present value of a companys cash flows Reveals the intrinsic value of a company
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Given that the houses are different sizes, it is more meaningful to look at their price as a multiplein this case price per square foot
$83 $200 $100 $160 $110
$120
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EBITDA = an approximation of cash flow Tells you how valuable a company is based on how much cash the operations generate relative to how much funding they required
Different industries may rely more on one metric than the other depending on whether cash flow or net income is a more meaningful measure of performance
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invest it
if you pay me $100 in one year, I lose a year
of investing it
so I will take the money now, thank you
pay me
A company can be described as paying back its equity holders over time by generating cash flow
Note: 1 Cash can also be reinvested to grow the business, making ownership share more valuable
Free cash flow is all the cash flow available to pay interest to lenders or dividends1 to shareholders
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Discount Rate
The discount rate represents an investors expected rate of return if they invested money today Bankers use the WACC (Weighted Average Cost of Capital) formula as a discount rate takes debt and equity returns into account
Terminal Value
Cuts off projections at a certain point in time
typically based on cash flow in last year of projections and expected free cash flow growth thereafter
DCF Example
Terminal Value
$mm
2006
2007
2008
2009
2010
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APPENDIX D
Terms to Know
Terms to Know
Product group investment banking group that focuses on a method of transaction or financing tool mergers & acquisitions, equity capital markets, debt capital markets cover all industry groups Industry group investment banking group that focuses on a specific industry consumer products, media, telecom, global industrial covers all product groups Premium the amount at which something is valued above its par or nominal value Discount the amount at which something is valued below its par or nominal value Bull market characterized by prolonged rise in prices of stocks, bonds, or commodities buy market with high trading volumes considered a good market because investors make money investors charge ahead like bulls
Bear market characterized by prolonged period of falling prices for stocks, bonds, or commodities sell market due to anticipation of declining market activity interest rates on bonds increase during such a period investors choose to avoid risk, buy bonds considered a bad market because investors lose money investors hibernate like bears
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Terms to Know
Equity value equity value = share price x number of shares outstanding value of shareholders interest Enterprise value enterprise value = equity value + debt cash includes all forms of capital main difference between equity value & enterprise value: enterprise value includes net debt (debt cash) EBIT (Earnings Before Interest & Taxes) also called operating income income from operations before the effects of financing and taxes measure of profitability independent of capital structure
EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) income from operations before the effects of financing, taxes, and non-cash expenses proxy for free cash flow, but a poor one
Multiples also called ratios provide a measure of relative valuation to an underlying financial (operating) statistic equation: valuation statistic/operating statistic Enterprise Value/Revenues, Enterprise Value/EBITDA, P/E allow for relative comparisons between similar companies equation: operating statistic/revenues Gross Profit/Revenues, EBITDA/Revenues, EBIT/Revenues, Net Income/Revenues
Margins
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Terms to Know
Free cash flow cash flow available to all providers of finance one measurement used in forecasting future performance EBITDA is a proxy for free cash flow, but a poor one Working capital working capital = current assets current liabilities funds invested in a companys cash finances the cash conversion cycle of a business: time required to convert raw materials into finished goods, finished goods into sales, and accounts receivables into cash
WACC (Weighted Average Cost of Capital) used in determining discount rate employed to calculate the net present value (NPV) of future cash flows in discounted cash flow (DCF) analysis return commensurate with risk of the investment
Time value of money equations present value (PV) = FV/(1 + r) future value (FV) = PV * (1 + r) note: r = discount rate
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Contact Information
UBS Securities LLC 299 Park Avenue New York NY 10171 Tel. +1-212-821 3000
www.ubs.com
UBS Investment Bank is a business group of UBS AG UBS Securities LLC is a subsidiary of UBS AG
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